Economic Calculation in the Socialist Commonwealth

Summary

Economic Calculation in the Socialist Commonwealth is a long article by the Austrian economist Ludwig von Mises, published in German in 1920 in the Archiv für Sozialwissenschaft und Sozialpolitik. It argues that a fully socialist economy, in which the state owns all the means of production, cannot calculate rationally, and it began one of the most important controversies in twentieth-century economics. Mises begins with the distribution of consumer goods, which a socialist state could manage by rationing or by issuing vouchers. The harder problem concerns production. A modern economy uses countless combinations of labor, raw materials, machines and time to make each product, and every decision about which method to use requires comparing costs. In a market economy, he argues, prices formed by exchange of the means of production give a common unit, money, in which these costs can be compared. Entrepreneurs can then calculate profit and loss and see whether a project uses resources wisely. In a socialist commonwealth there is no exchange of factories, mines or railways, because the state owns them all; consequently there are no market prices for them. Mises considers proposed substitutes, such as calculating in hours of labor or in physical quantities, and argues that none of them allows the planners to compare the many alternatives open to them. Without prices for the means of production, socialism cannot know whether it is using resources well or wasting them. He also argues that managers in a socialist system lack the responsibility and initiative that come from risking their own property, and that schemes for socialist markets would amount either to pretense or to a return to private ownership. The article provoked the socialist calculation debate. Socialist economists, among them Oskar Lange and Abba Lerner, replied in the 1930s that planners could reach correct prices by trial and error. F. A. Hayek, who had been converted from Fabian sympathies partly by Mises's related book Socialism, extended the argument by stressing that the knowledge needed for planning is dispersed and cannot be gathered at the center. The collapse of Soviet-type economies at the end of the 1980s renewed attention to the article, and it remains a key text of the Austrian school. An English translation by S. Adler appeared in 1935 in Collectivist Economic Planning, edited by Hayek.

Top Lessons

• What prices do

  Mises argues that prices are not just costs to pay but information that makes calculation possible. Students can consider how a business or household would decide without them.

• Ownership and responsibility

  Mises connects private ownership with the responsibility to bear losses. The argument invites discussion of incentives in any organization.

• A debate that lasted a century

  The article began an argument that drew in many economists and was revisited after the Soviet collapse. Students can trace how ideas are tested against events.

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